SmartPay EFTPositioned Nicely

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At 32 cents, which capitalises the company at $55 million, it is fair to say that Smartpay has not made a huge impact on the Australian stock market yet. But this is a stock worth watching, as a leader in the growing cashless payments space.

First we got used to EFTPOS transactions – now contact-less payment is all the rage.

It is not yet the “cashless society,” but it’s getting there.

And New Zealand-based payment solutions provider Smartpay Limited (SMP) is right at the forefront of this change. Smartpay designs, develops and implements innovative payment solutions for merchants and retailers. It has more than 45,000 EFTPOS terminals under rental contract in New Zealand and Australia: Smartpay provides the terminals, service and support to merchants in return for a monthly fee.

Smartpay supplies countertop broadband and dial-up EFTPOS terminals, and mobile terminals, as well as the new contactless terminals – both countertop and mobile (WiFi and Bluetooth) – handling transactions by PayWave (VISA) or PayPass (MasterCard) technology.

Smartpay also offers short-term EFTPOS terminal rentals for situations such as trade shows, school fetes, exhibitions, promotional events and pop-up stores. The company also designs and builds tailored EFTPOS solutions for individual businesses.

Smartpay was originally a distributor of prepaid electronic vouchers and card products, but moved into the payments business in 2009 when it bought the payments division of the former NZX-listed ProvencoCadmus from that company’s receivers. But Smartpay struggled with the high funding cost of its terminals, because it did not have a balance sheet that could attract cheaper debt.

That started to change in December 2011, the current Australian-based leadership, chief executive officer Bradley Gerdis and non-executive chairman Ivan Hammerschlag, came onboard. Gerdis was one of the founders of the Australian Securities Exchange (ASX)-listed Customers Ltd (CUS), which built a network of independent ATM machines in Australia, before being taken over by Canadian company DirectCash in 2012. Hammerschlag is executive chairman of the ASX-listed retail group RCG Corporation (RCG), which owns Athlete’s Foot and Podium and acts as the Australian distributor for the Merrell, Saucony, Cushe, Chaco, CAT (Caterpillar) and Sperry Top-Sider brands of footwear and apparel.

In 2012 the company – then a loss-maker – mounted a major restructuring of the balance sheet, involving a NZ$25 million bank debt facility with ASB, and the raising of NZ$13 million of equity capital, which saw two specialist New Zealand small-cap fund managers, Devon Funds Management and Milford Asset Management, come on to the share register.

Subsequently Smartpay bought out a rival company, Viaduct, to become the biggest terminal operator in New Zealand, with a market share of about 30%. From there, the logical next step was a move into the Australian market, both the payments terminal market and the capital market: the attraction in the former being that Australia was a much larger yet less mature market, and in the latter, that Australian institutional investors were becoming aware of Smartpay, but needed it to be listed on the ASX before they could invest.

Australian fund managers Hunter Hall and Pengana actually came on to the share register during the 2012 recapitalisation: they invested on the expectation of an eventual ASX listing.

Smartpay came to the ASX in September 2013. To accommodate ASX’s wishes for a share price greater than 20 cents, Smartpay – then trading at 15 NZ cents – did a one-for-two consolidation of the shares, and listed at 30 Australian cents.

The listing was a straight dual listing: no capital was raised, and the amount of shares outstanding post-consolidation did not change. once the shares were listed on the ASX.

Holders can nominate to the Smartpay registry which exchange they wish their shares to trade on. The price on either exchange is set by the respective buyers and sellers in those countries: usually it is the same price, converted as per the prevailing A$/NZ$ exchange rate, but occasionally there is a small arbitrage.

Clearly Smartpay believes the Australian payments terminal market – which has more than 800,000 EFTPOS terminals installed – is heading the same way as the ATM market, in which banks recognised that outside of their branch networks and large shopping centres, they didn’t want to supply ATMs – it was a non-core activity. Independent ATM owner/operators like Customers Limited placed ATMs in other retail outlets and also provided white-label machines for the banks.

For the same reasons, Smartpay believes that banks do not want to tie up capital in owning and operating large fleets of EFTPOS terminals. Just as independent players funded the provision of ATMs, so will they roll out EFTPOS terminals, and run them for the banks. The company has already signed Westpac and Bendigo and Adelaide Bank as partners: Smartpay says its business model is to work with banks to provide and operate EFTPOS terminals to merchants as its core business, not compete with them.

Smartpay broke through for its maiden profit in the half-year to September 2013, reporting net profit of NZ$884,000, up from a loss of NZ$2.4 million in the equivalent period. Revenue was up 51%, to NZ$11.3 million.

At 32 cents, which capitalises the company at $55 million, it is fair to say that Smartpay has not made a huge impact on the Australian stock market yet. But this is a stock worth watching, as a leader in the growing cashless payments space. In particular, Smartpay’s full-year result, for the year to March 31 2014, will be interesting, to see how strongly the company has consolidated its profitability, and what its outlook statement says about progress in the Australian market.

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au